Thursday, March 3, 2011

Random Selections

Nadezhda pointed FLG to this post, from which FLG has selected several quotations that support his own crackpot theories.

In regards to Felix Salmon's bullshit theory that the IPO is in some sort of terminal and permanent decline:
We have just been through six years when almost any company that could be purchased by private equity and was potentially worth purchasing by private equity has been purchased by private equity. With the exception of about eighteen months, PE firms could issue lots of low yield debt to buy the assets. I am an equity manager - and in searching for good assets private equity firms are my competition. I dislike them for it. (Never have so many Harvard MBAs been concentrated on so many small cap stocks...)

Private equity funds are also the biggest competitors to other private equity funds. All this competition means that private equity shops are doing worse and worse deals. Its got to the point where PE funds buy fake companies (see Carlyle with China Forestry and I suspect others).

In regards to Andrew question about my lack of small cap stock in my 401k:
If you were to buy a diversified pile of American large caps and sit back in a decade you would probably be OK - indeed better than OK. But small caps - the area on which my expertise would normally be most productively targeted - are frighteningly expensive - and the market is riddled with stock-promotes and outright frauds.

Before wrapping up, FLG would like to address a couple of things.

First, FLG is, in general, seriously disappointed by economic and finance bloggers and journalists. Many of them are merely conduits that transcribe so-called experts for the layperson, which is to say they try to be translators, which so far as that goes they're okay, FLG guesses. Where they get into big trouble is when they are providing the analysis and opinion, you know, the supposedly value added stuff. There they are often way out of their element. Seriously, do these people actually know anything about the topics they are reporting upon or they just winging it?

That brings FLG to Salmon. According to wikipedia, he worked for Nouriel Roubini and won an award for "insightful use of statistics as a tool to understanding the world of business and economics." Which all kind of makes sense to FLG. Salmon is good at finding and presenting data in statistical format. It's his analysis of that data that's so often off, at least in FLG's opinion. But then, if he worked for Dr. Doom, then maybe that makes sense as well. Although, FLG doesn't find Roubini's analysis anywhere near as lamentable as Salmon's. Maybe Roubini is simply smarter.

FLG thinks that he could do a far better job of providing analysis than the vast majority of economic and especially financial reporters, if he does say so himself, including Salmon. There are so few that even come to mind who have any sort of thorough understanding of finance. FLG has to read bloggers in the industry or academic professors to get any sort of useful analysis. It's pretty sad.

Oh, and the people who work in finance, often seem to have questionable ideas about macrolevel economic policy questions. So, they ain't perfect either.

Oh, but just to clarify, FLG thinks he could do a better job, but there's a major problem. He's far too lazy. That's why he's a shit employee, student, blogger, and would be, in reality, a shit economic or financial journalist. Which means he really couldn't do a better job.

Second, in regards to the quotation that indicates American large caps will outperform other investments over the next decade or so. This seems to validate FLG's focus on large caps, although he actually tries to spread it around the world so in truth is probably underweight American large caps in comparison to many other Americans who like all investors seem to have a Home Bias, but in reality this is more along the even a broken clock is right twice a day thing. Not some sort of financial savvy on FLG's part.


Andrew Stevens said...

Your quote doesn't really get you off the hook. I don't see how any of his logic really applies to buying the S&P 600 or S&P 400. He's talking about private equity small caps, for the most part, not publicly traded companies.

FLG said...


"f you were to buy a diversified pile of American large caps and sit back in a decade you would probably be OK - indeed better than OK."

nadezhda said...

Did I say PE in Em Mkts looked to be getting a bit frothy? Carlyle to launch $750m fund for Africa.

Now, Africa has some very good stories lately, so it was predictable that it would become the next place for serious money. (Though I am surprised that of 3 offices they plan to put 1 in Zimbabwe!)

Still, Carlyle is complaining about difficulties fundraising due to low interest rates & yield appetite. They're and hoping to tap SWFs, who reportedly have become more fee-sensitive. Seems to me, however, that the problem with small caps is as much on the supply side, as the Bronte Capital posts suggested.

And the expanding gray 2ndry mkt for PE in the more developed markets, which reduces the pressure for IPOs, is also part of the picture.

FLG said...


The FT site is fucking me over for some reason.


nadezhda said...

I've got an FT sub so that may be the problem with the link. Try this one.

And while editing the earlier comment, I managed to delete a phrase. Should have read that they're finding fundraising slow going but expect a pick-up due to low int rts and yield-chasing. (That's part of the demand-side froth. Duh.)

As for Zimbabwe, just passing along what they said. Jo'berg & Nigeria are self-evident, but I'd sure think about somewhere else in East Africa.

Mr Rubenstein [founder of Carlyle] was among the first buy-out executives to raise money in Libya and has oil money going into Carlyle funds from resource-rich African nations such as Angola.

The soon-to-be-launched Carlyle fund would be overseen by a team of three with a presence in Johannesburg, Zimbabwe and Nigeria, these people added.

Carlyle already has a significant presence in north Africa, as well as a dedicated private equity fund for the Middle East and north Africa.

Many parts of Africa are now enjoying better prospects than at any time in recent history due largely to a rush for resources led by the Chinese.

“The majority of Americans don’t pay enough attention to Africa,” one source close to Carlyle said. “It has been China that has been the catalyst for economic activity in Africa.”

So even though the Bronte stories suggest they're played out in China (or getting there), they're still pushing a China angle in their elevator pitch, but this time the China play is in Africa.

Andrew Stevens said...

That's pretty much what I said in the comments. In fact, I thought you were saying that a decently large international exposure is important. (I do have a decently large international exposure since I'm an asset class junkie, but I don't think it matters very much.)

FLG said...


FT's site sucks if you don't have a sub. Nevertheless, it's a very fascinating story.

To tell you the truth, I'm very skeptical of the whole the Chinese are in Africa, and so somehow we are losing out if where aren't there idea that's floating around. It's usually framed as a geopolitical/strategic concern, so not necessarily something vis-a-vis Carlyle. But even then, when a nation-state decides to pursue something, like China in Africa, it doesn't say anything about business opportunities -- it says they see, again, some sort of national interest. Doesn't mean it will pay off in economic terms.

(To be honest, that's more directed at a fellow MBA student who has no idea that I have this blog and therefore will never read this, but who is unthinkingly enamored of everything China.)


It's funny. I was thinking more about how you asked about the lack of small caps. Whereas, you focused more on the domestic versus int'l. I trying to use it to support my focus on large caps by ignoring the "American" part comment.

Andrew Stevens said...

Just to clarify my position:

If you're trying to emulate the total world market, you probably should have small caps (both U.S. and international) in your portfolio. If you don't, I expect you'll lose a small amount of return (but have less risk, so there you are). Arguably, small cap stocks should even be a bit overweighted to account for the fact that there are lots of private equity small cap companies, but very few private equity large cap companies, so overweighting small caps might even replicates the actual world market a bit better. (But this is a rather fanciful theory.)

I would expect that you'll do just fine with only large cap stocks.

I would expect that you'll do just fine with only U.S. large cap stocks.

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